Part 1 The Year in Review by the Chairperson, Dr Ian Douglas

This annual report marks the twenty-sixth year of operations of the International Air Services Commission (the Commission). It is my pleasure to provide an overview of the activities of the Commission for the last 12 months.

The last financial year was the busiest period for the Commission for some time, and the Commission dealt with 62 applications. The majority of the applications were straightforward, but an application by Qantas to code share with Air Niugini on the Papua New Guinea route (PNG) was more complex and required a substantial amount of detailed work. The larger workload during the 2017–18 year required the Commission to hold a larger number of meetings, with a total of 19 meetings during the year. While some meetings were conducted face-to-face in Canberra, the Commission carried out its work by teleconference or by email wherever possible.

In March this year, the Honourable Michael McCormack MP, issued the International Air Services Commission Policy Statement 2018 (the 2018 Policy Statement), replacing the Policy Statement made in 2004. The 2018 Policy Statement that came into effect on 28 March 2018 sets out the criteria which the Commission is required to apply in assessing the benefit to the public of allocations of capacity. The case study in this year’s annual report discusses in further detail the provisions of the new 2018 Policy Statement.

In the year to May 2018, there was a steady growth of international passenger movements into and out of Australia. Passenger traffic increased by 5.1% compared to the year ended May 2017. Airlines increased their capacity in terms of seats made available by 4.7% and load factors increased by 0.2 percentage points to 79.4%.

While the over-all passenger traffic into and out of Australia increased, the share of passenger traffic by Australian designated airlines (Qantas, Jetstar Airways, Virgin Australia and Tigerair Australia) decreased from 32.1% in 2016 to 31.5% in 2017. Qantas continues to have the largest share of passenger traffic with 16.4%, followed by Jetstar with 9.1% while Virgin Australia has 6.0% share. Of the foreign airlines serving Australia, Emirates (8.3%), Singapore Airlines (8.1%) and Air New Zealand (6.6%) are the largest operators.1.

From 23 March 2018, Qantas commenced non-stop fights from Perth to London, followed two days later with the re-commencement of Qantas’ Sydney-Singapore-London services. With this change Qantas ceased their operations to the United Arab Emirates (UAE), and returned its capacity allocation for that route in May 2018. This follows the return of Virgin Australia’s UAE capacity allocation in April 2017.

Significant changes for Virgin Australia included the commencement from July 2017 of its own-operated services between Melbourne and Hong Kong. The airline initially operated three services per week, increasing to five, with two additional weekly services operated between March and June. From 2nd July 2018, Virgin Australia introduced daily fights from Sydney to Hong Kong alongside its Melbourne - Hong Kong operations.

In FY 2017–18, the Commission issued nine determinations allocating new capacity and 21 determinations renewing capacity allocations. Virgin Australia applied for and was issued additional capacity entitlements enabling further expansion of services on the following routes: Cook Islands, Fiji, Hong Kong, Italy and Samoa. Qantas applied for and was issued new determinations allocating capacity on the Fiji, Indonesia and Italy routes.

The Commission conducted 32 reviews of determinations at the request of the airlines, with 30 reviews resulting in decisions granting the requested variations to the determinations. Most of the applications for variation sought authorisation to use allocated capacity for code share, either with another Australian carrier or with a foreign carrier. Codeshare allows a carrier to offer a larger network by marketing a fight number on a partner airline. This may be on routes where the airline does not have its own operations, or in markets where joint ventures have been approved. For the operating carrier, code share arrangements often strengthen distribution and deliver increased traffic feed, particularly outside the operating carrier’s home market.

Code share arrangements continue to be closely examined by the Commission as in some circumstances the Commission may determine that such arrangements would not be of benefit to the public. The attributes that make code share arrangements attractive to a carrier may, in the Commission’s view, result in increased barriers to market entry and reduce competition on some routes. The history of the Commission’s consideration of code share arrangements on the Papua New Guinea route illustrates some of these tensions. In its most recent detailed examination of proposals for code sharing between Qantas and Air Nuigini on this route, the Commission issued draft determinations outlining that it considered the proposed free-sale code share arrangements would not be of benefit to the public. Qantas subsequently withdrew the application it lodged in February 2018 seeking the Commission’s authorisation of the code share arrangements. The Commission will continue to carefully consider all code share proposals on a case by case basis in response to each application.

Over the past few years, the China route has seen a significant capacity growth, with China being both a source of tourism and a travel destination for Australians. In December 2016, the aeronautical authorities of Australia and China agreed to liberalise the air services arrangements between the two countries to allow for unrestricted capacity entitlements, thus permitting the designated airlines of both countries to determine the frequency, capacity and aircraft type to be operated between Australia and China.

In the year ending December 2017, China was the second highest source of passenger arrivals into Australia, next to New Zealand having displaced the USA, which is now the third largest market2. Additionally, the operated seats by Australian carriers 3 on the China route increased by 46% compared to last year4.In June 2016 the Commission issued Virgin Australia capacity of 1,925 seats per week to operate services between Australia and mainland China and awaits Virgin’s commencement of services on this route5.

Not all markets have seen growth, and while passenger traffic on the China route has grown considerably, capacity operated by Australian carriers to Fiji and Indonesia (Bali), two of the traditional tourist destinations for Australian travellers, decreased by 9.3% and 9.1% respectively.6

In June 2017, the relevant authorities of Australia and Italy updated the air services arrangements between the two countries. The number of code share seats which may be offered by designated airlines of Australia under code share arrangements with third country airlines on the Italy route was increased to 1,700 seats per week and the bilateral arrangements permitted the weekly capacity entitlements allocated for code share services to be averaged over 12 months rather than to reflect a weekly maximum utilisation. In light of the increase in third country code share capacity entitlements, Qantas sought and was granted 600 third country code share seats (bringing Qantas’ total allocation to 1,000 seats) while Virgin Australia applied for and was issued 300 third country code share seats (bringing Virgin Australia’s total allocation to 600 seats).

An important aspect of our work in the Commission is engagement with our stakeholders. During the reporting period, we conducted face-to-face meetings with officers from Qantas, Virgin Australia and the ACCC. In January this year, officials from the Aviation and Regulatory Development areas of the Malaysian Aviation Commission (MAvCom) met with us as part of MAvCom’s consultations with foreign agencies performing similar functions. The meeting provided a valuable opportunity to exchange information on best regulatory practices.

Appointment matters

In 2017, we welcomed Ms Karen Gosling who was appointed by the Governor-General as a part-time Member of the Commission, for a three-year period, with effect from 1 November 2017. Ms Gosling is a former senior executive service officer in the Australian Public Service with extensive experience in the infrastructure, transport and regional development portfolios of government. Ms Gosling’s broad experience in government regulatory work is a most valuable addition to the collective expertise within the Commission.

As we review our performance during the year, I would like to thank the Executive Director, Ms Marlene Tucker, and her small team in the Secretariat for their invaluable advice and assistance in ensuring that the Commission functions smoothly and efficiently.

I would like to thank my fellow Commissioners, Ms Jan Harris and Ms Gosling, for their valuable expertise and contribution in performing the functions and duties of the Commission in this busy year.

2 Arrivals from New Zealand totaled 2,763,760 with 3.3% increase from last year; arrivals from China totaled 2,000,880 growing by 12.9% from last year; USA arrivals totaled 1,852,080 with 3.4% growth from last year (source: Bureau of Infrastructure, Transport and Regional Economics, year ending December 2017)